(Taxation of Bayu-Undan Contractors) Regulations, 2013

(Taxation of Bayu-Undan Contractors) Regulations, 2013 Interpretation Chapter I Section 1 Preamble & Purposive interpretation & Short Title Where Sections in the present Regulation are capable of alternative interpretations, the interpretation that best achieves the intended purpose of the Taxation of Bayu-Undan Contractors Act, Law No. 3/2003 shall be adopted and any interpretation that frustrates the intended purpose of the legislation or impedes the right of Timor-Leste to collect the tax revenue accruing from Petroleum Operations in accordance with the applicable tax laws, including Treaties shall be rejected. The present Regulations shall be referred to as TBUCA Regulations/19-2013 Section 2 Definitions extend to other forms of words 2.1 Definitions in the present Regulations in the singular form shall be read as applying to the plural form and definitions in the plural form shall be read as applying to the singular form as appropriate. 2.2 Definitions in the present Regulations in the masculine form shall be read as applying to the feminine form and definitions in this section in the feminine form shall be read as applying to the masculine form. Section 3 Scope of Regulations The present Regulations shall apply to the territory of Timor-Leste, including its territorial sea, and to its exclusive economic zone and continental shelf where, by international law, Timor- Leste has sovereign rights for the purposes of exploration for and exploitation of its natural resources and applies only in the area covered by the Production Sharing Contracts described in Annex F of the Timor Sea Treaty, namely: Production Sharing Contracts JPDA 03-12 and JPDA 03-13, inclusive of amendments and annexes to the contracts stipulating the natural gas valuation. The present Regulations shall apply to a Contractor and Subcontractor (where appropriate) in connection with Petroleum activities or Petroleum Operations in the limited area described and designated as Annex F in the Timor Sea Treaty. 1

Section 4 Definitions In the present Regulation: Accounting means a systematic process under the IFRS or a Generally Accepted Accounting Practice, of recording of data and information in respect of assets, liabilities or debt, equity, income and expenditures, and all outlays associated with the acquisition and delivery of goods and services, resulting in a financial report in the form of a balance sheet and profit and loss statement at end of each reporting period Affiliate means in respect of a Contractor (or, if more than one person, in respect of each such person), a person that controls, is controlled by, or is under common control with the Contractor; Associate in relation to a person means any other person who acts or is likely to act in accordance with the wishes of the person as a result of a connection between the persons or common ownership or control; it includes: a) A natural person and a relative of the natural person; b) A legal person and any person who owns directly or indirectly 50% or more, by value or number, of the capital or voting rights in the legal person; or c) Two or more legal person if a third owns directly or indirectly 50% or more, by value or number, of the capital or voting rights in each person; Amount includes any value in kind or cash; Air or Sea Transportation Services means any transportation of passengers, mail, or goods by air or sea: a) between two places in Timor-Leste; b) From a place in Timor-Leste to a place outside Timor-Leste; c) From a place outside Timor-Leste to a place in Timor-Leste Annual Tax Return means a form used by a taxpayer to report the calculation and/or payment of tax due within a tax year as prescribed by the Commissioner and or the Tax Administration; Approval means a written authorization by the authorizing organization, body or person; Approved Contract means a contract made by the Contractor and approved by the responsible Ministry or Designated Authority, as the case may be, as part of a Development Plan; Arm s Length Transaction means transactions in which the conditions and or terms imposed between two related parties or associates in their commercial or financial relations are similar to those which would be made between independent and unrelated enterprises; 2

Audit means a series of activities to seek, gather and process data, documents and or information for tax compliance purposes; Bank means any legal person licensed to accept deposits, and using such funds, either in whole or in part, to make extensions of credit or investments for the account, and at the risk, of the person carrying on the business; Bayu-Undan is the discovered part of the Bayu-Undan field, as defined and designated in the Production Sharing Contracts JPDA 03-12 and JPDA 03-13; Board means the Board of Tax and Customs Appeals established under the UNTAET Regulation 2000/18, including any amendments; Body means a type of business organization which may be a limited company, limited partnership, an enterprise owned by the government in whatever name and form, association, cooperative, joint venture or similar arrangement, permanent establishment and other such business enterprise; Carry Forward Loss means a loss carried forward under Article 6(2) of the Law on Income Tax; Code means the Petroleum Mining Code agreed and adopted by Timor-Leste and Australia under Article 7 of the Timor Sea Treaty, as amended, varied, modified, or replaced from time to time, and the regulations or orders made thereunder; Commissioner means the Commissioner or the Director General of the Directorate of Revenue of the Ministry of Finance, Timor-Leste; Contract Area means the area that is subject of a Petroleum Agreement and, if any part of a Contract Area is relinquished pursuant to a Petroleum Agreement, the Contract Area is the Contract Area originally granted; Contractor means a person deemed to be a taxpayer who: (a) has entered into the Production Sharing Contract JPDA 03-12 or JPDA 03-13, or a Production Sharing Contract superseding the previous ones, in accordance with Annex F of the Timor Sea Treaty; or (b) succeeds to a taxpayer mentioned in paragraph (a) above, or who is an assignee thereof, under the terms provided for by the Production Sharing Contract JPDA 03-12 and or JPDA 03-13, as the case may be., and who is registered as a contractor under the terms of the Petroleum Mining Code; and (c) any other person who has entered into a Production Sharing Contract with the Designated Authority or the responsible Ministry, within the Annex F part of the JPDA; 3

Control means in relation to a person, the power of another person to secure: a) by means of the holding of shares or the possession of voting power, in or in relation to the first person or any other person; or b) by virtue of any power conferred by the articles of association of, or any other document regulating, the first person or any other person, that the affairs of the first person are conducted in accordance with the wishes or directions of that other person; Controlled Taxpayer means any one of two or more taxpayers owned or controlled directly or indirectly by the same interests, and includes the taxpayer that owns or controls the other taxpayers; Controlled transaction or controlled transfer means any transaction or transfer between two or more members of the same group of controlled taxpayers. The term uncontrolled transaction means any transaction between two or more taxpayers that are not members of the same group of controlled taxpayers;. Crude Oil means crude mineral oil and all liquid hydrocarbons in their natural state or obtained from Natural Gas by condensation or extraction; Customs Controller means the Controller of the Customs Service; Customs Service means the Timor-Leste Customs Service; Customs Value means the fair market value of the goods including cost, insurance and freight as determined in accordance with article VII of GATT, or any amendments thereunder; Deactivation Costs means the expenses approved under a Decommissioning Plan by the responsible Ministry or Designated Authority, as the case may be, under a Petroleum Agreement; Deactivation Plan in respect of a petroleum project means, the Deactivation Plan approved in writing by the Designated Authority pursuant to the Production Sharing Contract that regulates a petroleum project, entered into between the Designated Authority and the Contractor; Depreciable Asset means any tangible movable property that: (a) has a useful life exceeding one year (12 months); (b) is likely to lose value as a result of wear and tear, exploitation, or obsolescence; and (c) is wholly or substantially used in the conduct of taxable activities; Designated Authority means the Designated Authority established under Article 6 of the Timor Sea Treaty; Designation Notice is a notice described in Section 68 of UNTAET Regulation 2000/18; Development Expenditure means expenditure incurred, after the responsible Ministry or Designated Authority has approved a Development Plan, in preparing a site for Petroleum 4

Operations, including drilling and completing production wells, and the construction of production facilities, but does not include any expenditure incurred in the acquisition or construction of a pipeline or in the acquisition of a depreciable asset; Development Plan in respect of a petroleum project means, a Development Plan approved by the Designated Authority pursuant to the Production Sharing that regulates a petroleum project, entered into between the Designated Authority and the Contractor Dividend means any distribution of profit from current year or from accumulated earnings by a legal person to a member as a result of participation in the capital of the legal person, including: a) Any amount returned to a member in respect of a membership interest in a legal person on a partial reduction in capital to the extent that the amount returned exceeds the amount or value by which the nominal value of the membership interest was reduced; or b) Any amount distributed to a member on redemption or cancellation of a membership interest, including liquidation, to the extent the amount distributed exceeds the nominal value of the membership interest; Elang Kakatua Kakatua North means the discovered area Elang Kakatua Kakatua North, as defined in Production Sharing Contract JPDA 03-12; Exploration Expenditure means expenditure relating to and connected with geological, geophysical and geochemical surveys, exploration or appraisal drilling, or feasibility and environmental impact studies incurred in conducting Petroleum Operations prior to the grant of an approval of the Development plan by the responsible Ministry or Designated Authority, as the case may be; Export Pipeline means an export pipeline as defined in the Production Sharing Contracts JPDA 03-12 and JPDA 03-13; Field Export Point means the point at which petroleum from a Contract Area leaves the Contract Area, or such earlier point at which it is loaded onto or enters a vessel, pipeline, or other means of transportation to be transported from the Contract Area; Financial institution means any licensed bank or other licensed legal person that is primarily engaged in the business of making credit extensions or investments for the account, and the risk, of the person carrying on the business; Goods means any substance, organism, article or thing, whether manufactured or natural, which is not a human body, cadaver or human remains; Head Office Expenditures means any executive, management, or general administration expenditures incurred by a non-resident person in the ordinary course of business, and which expenses are incurred solely and primarily for business purpose and for the benefit of the permanent establishment of the person in Timor-Leste; 5

Intangible Asset means any property, other than tangible movable or immovable property, that: a) has a useful life exceeding one year; b) is used wholly or substantially in the conduct of taxable business activities; Intangible expenditure means any expenditure incurred other than in the acquisition of any tangible movable or immovable property, or tangible asset; Interest means: a) any amount (including a premium or original issue discount) paid or accrued under a debt obligation that is not a repayment of capital and pursuant to petroleum operations; or b) any amount that is functionally equivalent to an amount referred to in paragraph (a), such as amount paid or accrued under an interest rate swap agreement or as defaulted under a guarantee agreement, pursuant to petroleum operations; c) any commitment, guarantee, service, or similar fee payable in respect of a debt obligation or other instrument or agreement giving rise to interest under paragraphs (a) or (b); International Financial Reporting Standards means the most recent International Financial Reporting Standards issued by the International Accounting Standards Board or any successor entity taking over the role of issuing International Financial Reporting Standards; Joint Commission means the Joint Commission established pursuant to Article 6 of the Timor Sea Treaty; "Law on Income Tax" means the Law on Income Tax, applicable in Timor-Leste as defined under UNTAET Regulation No. 1999/1 "Law on Income Tax Regime and Procedures" means the Law on the General Tax Regime and Procedures applicable in Timor-Leste, under the terms of the UNTAET Regulation No. 1999/1; "Law on Value Added Tax on Goods and Services and Sales Tax on Luxury Goods" means the Law on Value Added Tax on Goods and Services and Sales Tax on Luxury Goods, applicable in Timor-Leste, under the terms of UNTAET Regulation No. 1999/1; Legal Person means: a) any limited liability company, joint stock company, general partnership, limited partnership, or other unincorporated association or body of persons, whether incorporated, formed, organized, or established in Timor-Leste or elsewhere; b) any trust, undivided estate of a deceased natural person; 6

c) a government, a political or administrative subdivision of a government in whatever name or form, or public international organisation, or an entity, organisation, association, or business form owned by a government, political subdivision of a government, or public international organisation; Long-Term Contract is a contract for manufacture, installation, maintenance, or construction, or services related thereto, that is not completed in the tax year in which work under the contract commenced, other than a contract estimated to be completed within six months of the date on which work under the contract commenced; Management Services means the provision of managerial services, consulting, supervisory or other similar services for a fee between related parties; Member in relation to a legal person means a shareholder, partner in a partnership, or any other person with a membership interest in a legal person; Method of Accounting includes not only the overall method of accounting of the taxpayer but also the accounting treatment of any item; Mining means any method or process by which any mineral is taken from the soil or from any substance or constituent of the soil; Mining Support services means every service relating to mining other than technical, management, consulting, or architectural services; Natural Gas means all gaseous hydrocarbons and inerts, including wet mineral gas, dry mineral gas, casing head gas, and residue gas remaining after the extraction of liquid hydrocarbons from wet gas, but not crude oil; Natural Resources means any mineral, petroleum, or any other living or non-living resource that may be taken from the land or sea; Non-Resident Person means any person who is not present in Timor-Leste for a period of, or periods in aggregate to, one hundred and eighty three days or more in the tax year in aggregate; Non-Wage Benefits means any reward for services provided by an employer to an employee, including: (a) (b) (c) the market value of any non-cash benefit provided by an employer to an employee; the value determined by the Commissioner of the provision by the employer to an employee of the use of a motor vehicle wholly or partly for private purposes of the employee; the value determined by the Commissioner of the provision by the employer of accommodation or housing; 7

(d) (e) the value determined by the Commissioner of the provision by an employer to an employee of a housekeeper, driver, guard, gardener, or other domestic assistant; and the cost to the employer of providing an employee with any meal, refreshment, or entertainment except in the course of providing a good or service for the employer where the Commissioner considers that the cost of provision for the employer is reasonable; Overall Deactivated Costs Approved means the total deactivation costs approved by the Designated Authority in writing, in accordance with the Deactivation or Decommissioning Plan for a petroleum project, including revisions and or amendments to date; Person means: (a) a natural person, including a sole trader; (b) a company, wherever incorporated, or other juridical person; (c) a partnership, wherever formed; (d) a trust, wherever established; or (e) any other unincorporated association or body of persons; Percentage Transfer Factor under Sections 13 of the present Regulations and 16 of the Taxation of Bayu-Undan Contractors Act means the percentage of the right or stake held by the transferring or assigning Contractor, in a petroleum project, which is either transferred or assigned, divided by the total percentage of the right or stake held by the transferring or assigning Contractor in the petroleum project immediately before the occurrence of the transfer or assignment; Petroleum means: (a) any naturally occurring hydrocarbon, whether in a gaseous, liquid or solid state; (b) any naturally occurring mixture of hydrocarbons, whether in a gaseous, liquid or solid state; or (c) any naturally occurring mixture of one or more hydrocarbons, whether in a gaseous, liquid or solid state, as well as other substances produced in association with such hydrocarbons, and includes any petroleum as defined by paragraphs (a), (b) and (c) as defined above, that has been returned to the reservoir; Petroleum Agreement means (a) a contract, licence, permit, or other authorization in relation to petroleum operations made or given pursuant to the Timor-Leste Petroleum Act, except Seepage Use Authorisation; or (b) an authorisation or production sharing contract made under the Code; Petroleum Project means authorized activities in Bayu-Undan, with the exception of Elang Kakatua Kakatua North, under a Petroleum Agreement; 8

Reserves means the estimated quantity of petroleum or gas that can be expected to be profitably extracted, processed, and sold under the current and foreseeable economic conditions; Reservoir means an accumulation of petroleum in a geological unit limited by rock, water or other substances without pressure communication through liquid or gas to another accumulation of petroleum; Resident in respect of a natural person means: a natural person who is present in Timor-Leste for more than 183 days in a tax year unless the person s permanent place of abode is not in Timor-Leste; Royalty means any amount, however described or computed, whether periodical or not, as consideration for: Sales Tax Value means: (a) the use or right to use any copyright, patent, design, or model, secret formula or process, trademark, or other like property; (b) the use or right to use any motion picture films, films or video tapes for use in connection with television or internet broadcasting, or tapes for use in connection with radio or internet broadcasting; (c) the receipt of, or right to receive, any visual images or sounds, or both, transmitted by satellite, cable, optic fiber, or similar technology in connection with television, radio, or internet broadcasting; (d) the supply of any scientific, technical, industrial, or commercial knowledge or information; (e) the use of or right to use any tangible movable property; (f) the supply of any assistance that is ancillary and subsidiary to, and is furnished as a means of enabling the application or enjoyment of, any such property, supply, or right as mentioned in paragraphs (a)-(e); (g) the partial or total forbearance in respect of any matter referred to in paragraphs (a)-(f); or (h) the disposal of any property or right referred to in paragraphs (a)-(g); (a) for imported taxable goods, the customs value of goods increased by any import duty and excise tax payable on the importation of the goods; (b) for taxable goods sold in Timor-Leste, the price of the goods not including any sales tax; and (c) for taxable services provided in Timor-Leste, the price of the service not including any sales tax; Seepage Use Authorisation has the meaning in the Timor-Leste Petroleum Act; Services includes the hiring of equipment; 9

Subcontractor means any person supplying goods or services directly or indirectly to a Contractor in respect of a petroleum project; Tax Administration means the National Directorate of Petroleum Revenue or any other public bodies or central services charged under the laws of Timor-Leste to carry out the enforcement of petroleum and mineral tax laws and collect petroleum and mineral taxes and duties, Commissioner or the Minister of Finance or any other competent member or organ of the Government, when exercising their administrative and or statutory power in relation to tax matters, including policies and regulations; Taxpayer is anybody, individual or corporate, who or which, pursuant to the provisions in the tax laws, is required to fulfill tax obligations (including filing of periodic information returns and registration with the Tax Administration of Timor-Leste, and who are compliant), persons required to withhold certain withholding taxes, be it income or wages-related and remit same to the Timor-Leste Tax Administration and persons who are deemed to be Contractor or Subcontractor and carrying on oil and gas business within the Annex F part of the Joint Production Development Area; Tax Assessment means understatement of tax and or underpayment of tax including interest and any additional tax imposed under Sections 72, 73 and 74 of UNTAET Regulation 2000/18; the Law on Income Tax, the Law on the General Tax Regime and Procedures (to the extent applicable in Timor-Leste) and the present Regulations; Taxable Business Activities means business activities carried on to derive business income and which is includible in gross income; Tax Collection Notice or Notice of Assessment means a form for the imposition and collection of tax and or additional or administrative penalties either in the form of interest, fines etc; Tax Correction Notice means a notice correcting errors in writing or calculation and or errors in the application of relevant principles or provisions of tax laws in connection with a tax return or Tax Collection Notice or Notice of Assessment; Tax Form means: (a) an annual income tax form, including all the required information and or data; (b) an annual Additional Petroleum Tax form, including all the required information and or data; (c) an annual wage income tax withholding information form, including all the required information and or data; (d) an excise tax form; (e) the income and Additional Petroleum tax instalment forms, ; (f) an income tax withholding form; (g) a sales tax form; 10

(h) a services tax form; (i) a wage income tax withholding form; (j) any forms designated by the Commissioner for the purposes of persons applying for tax identification numbers and being registered for tax purposes; (k) any forms designated by the Commissioner under Section 45.1(c) of the UNTAET Regulation 2000/18; or (l) any consolidated form designated by the Commissioner which includes the information from 2 or more of the above forms; provided that where, in relation to any person, any consolidated form has been designated by the Commissioner, then the forms which that consolidated form has replaced shall no longer be tax forms ; Tax Period means a calendar month or calendar year, unless otherwise stipulated by the Commissioner and or the Minister of Finance, as the case may be; Tax Return means a form designated as such by the Commissioner under Section 42 of UNTAET Regulation 2000/18 or described in Section 3 of the UNTAET Regulation 2000/18, including all the required information and or data or a form used by a Taxpayer to report the calculation and payment of tax due pursuant to the provisions of the applicable tax laws; Tax Treaty means: (a) an agreement between the Government of the Democratic Republic of Timor- Leste and the government of a sovereign country providing for the relief from double taxation and the prevention of fiscal evasion; or (b) an agreement between the Government of the Democratic Republic of Timor- Leste and the government of a foreign country providing for reciprocal assistance in the enforcement of income tax liabilities; Tax Year means the 12 month period from 1 January to 31 December, or if a taxpayer has permission to use a substituted tax year, the substituted tax year; Timor-Leste, when referring to a geographic area, means the territory of Timor-Leste and its territorial waters, the economic zone off the coast of Timor-Leste as defined in Section 4 of the Constitution of the Democratic Republic of Timor-Leste and recognized under the law of the Sea and by any Treaty Of Timor-Leste; Timor-Leste Petroleum Act means the Timor-Leste Petroleum Act, 2004 as amended, varied, modified, or replaced from time to time, and includes any regulations and amendments made under the Act; Timor Sea Treaty means the Timor Sea Treaty dated 20 May 2002 between the Government of the Democratic Republic of Timor-Leste and the Government of Australia; 11

Transaction means any sale, assignment, lease, license, loan, advance, contribution, or any other transfer of any interest in or a right to use any property (whether tangible or intangible, real or personal) or money, however such transaction is effected, and whether or not the terms of such transaction are formally documented. A transaction also includes the performance of any services for the benefit of, or on behalf of, another taxpayer; True taxable income means, in the case of a controlled taxpayer, the taxable income that would have resulted had it dealt with the other member or members of the group at arm's length. It does not mean the taxable income resulting to the controlled taxpayer by reason of the particular contract, transaction, or arrangement the controlled taxpayer chose to make (even though such contract, transaction, or arrangement is legally binding upon the parties thereto); Uncontrolled comparable means the uncontrolled transaction or uncontrolled taxpayer that is compared with a controlled transaction or taxpayer under any applicable pricing methodology. Uncontrolled taxpayer means any one of two or more taxpayers not owned or controlled directly or indirectly by the same interests; Underlying Ownership in relation to a legal person, means a membership interest in the person held, directly or indirectly through an interposed legal person or persons, by a natural person or by a person not ultimately owned by natural persons; Wages means any reward for services provided by an employer to an employee, including: (a) (b) (c) (d) (e) (f) (g) (h) (i) (j) any salary provided to the employee, including leave pay, overtime payments, commissions, and bonuses; director s fees; the value of gifts provided by an employer to an employee; any allowance provided by the employer for the benefit of an employee; any payment provided by the employer in respect of loss or termination of employment; any payments however described made on termination of employment in respect of entitlements outstanding at the time of termination; the reimbursement or discharge by an employer of any expense of the employee including utilities expenses; the amount of any reimbursement or discharge by an employer of an employee s medical expenses; the amount of any waiver where any employer waives an obligation of the employee to pay an amount owing to the employer; and Non-wage benefits greater than $20 provided in a calendar month to employees of an employer that is exempt from income tax; Verification is a series of steps undertaken to evaluate the completeness and accuracy of an information provided to the Commissioner and or the tax administration of Timor-Leste. 12

Section 5 Applicable Laws 5.1 Every contractor executing a petroleum project, whether directly or indirectly through an Operator, is liable to tax in accordance with: a) the applicable Indonesian Law on Income Tax; b) the applicable Indonesian Law on Value Added Tax on Goods and Services and Sales Tax on Luxury Goods; c) the applicable Indonesian Law on the General Tax Regime and Procedures, as modified by the UNTAET Regulation 2000/18 and or the present Regulations, including amendments thereto and the modifications contained in the Taxation of Bayu-Udan Contractors Act, Law No. 3/2003. 5.2 The application of subparagraphs 5.1(a)-(c) above shall be done in accordance with the provisions of the UNTAET Regulation No. 1999/1. 5.3 Every Subcontractor carrying on business within the Annex F part of the Joint Production Development Area shall be subject to the provisions of Section 5.1 insofar as it is relevant and applicable to their operations as Subcontractors. 5.4 The corporate tax rate on the assessable income of a Contractor and Subcontractor shall be 30 per cent (30%). 5.5 Notwithstanding the provisions of subparagraphs 5.1 and 5.2 above, Contractors who are deemed to be taxpayers in Timor-Leste as defined in the present Regulations are exempt from the taxes of Timor-Leste, including taxes applicable under the Indonesian Law on Income Tax, the Law on Value Added Tax on Goods and services and Sales Tax on Luxury Goods, and of the Law on the General Tax Regime and Procedures, as modified by UNTAET Regulation No. 2000/18, including any amendments thereto, in relation to income and building activities, installation and operation of an export pipeline. An amount is Timor-Leste-source income to the extent to which the amount is connected with the performance of petroleum operations or project: (a) income from petroleum operations or project carried on by a Contractor or Subcontractor resident in Timor-Leste; or (b) by a non-resident through a permanent establishment in Timor-Leste as determined under the present Regulation and any other applicable tax laws; (c) income from the alienation of any movable property of a Contractor used in deriving Timor-Leste-source income referred to in subparagraphs (a) and (b); 13

14 (d) income from the lease of immovable property in Timor-Leste whether improved or not, or from any other interest in or over immovable property, including the right to explore for, or exploit, natural resources, in Timor-Leste; (e) income from the alienation of any property or right referred to in paragraph (d) or from the alienation of any ownership interest in a legal person the assets of which consist wholly or principally of property or rights referred to in paragraph (d); (f) dividend paid by a resident or permanent establishment; (g) interest, royalties, management fees, annuity, or any other income paid by a resident or borne by a permanent establishment in Timor-Leste of a non-resident; (h) income from services rendered in Timor-Leste relating to construction, building activities, construction consulting services, air or sea transportation, mining and mining consulting services, insofar as the remuneration is paid by a resident person or borne by a Timor-Leste permanent establishment of a non-resident person; and (i) notwithstanding paragraphs (a)-(h), an amount taxable in Timor-Leste under an international agreement or Treaty. 5.2. Income is a foreign source to the extent to which it is not Timor-Leste-source income. Section 6 Reserve for Deactivation Costs Expenditure 6.1 Notwithstanding the provision of Article 9.1(c) of the Law on Income Tax, for the purposes of computing the taxable income for a tax year, a Contractor may deduct the annual amount transferred to a reserve established to deactivate a petroleum project against the gross income arising from the petroleum project. 6.2 The annual amount transferred to a reserve for a tax year and allowable as deduction for a tax year under Sections 4 of the Taxation of Bayu-Undan Contractors Act and 6.1 of the present Regulations, is the amount determined for that year under a Petroleum Agreement and arising from the Total Deactivation Costs agreed upon between the Designated Authority and the Contractor or Contractors. 6.2.1 The value of the reserve referred to in paragraph 6.1 for a given tax year is the value authorized in writing for that year by the Designated Authority and within the scope of the Production Sharing Contract or Contracts regulating a petroleum project, entered into between the Designated Authority and the Contractor. 6.3 As a condition precedent to the tax deductibility of Deactivation Cost allowable pursuant to Section 4 of the Taxation of Bayu-Undan Contractors Act in the current year, a Contractor is required to exhibit a copy of the approval granted by the Designated Authority to the annual tax return submitted to the Commissioner and in which a claim is made for such deduction against the taxable income and or Additional Petroleum Tax.

6.4 The amount of Deactivation Cost deductible in a current tax year shall be calculated on the basis of the formula prescribed pursuant to Section 4(2) of the Taxation of Bayu-Undan Contractors Act. 6.5 If, at any time, the value of the Deactivation Costs deductible under this Section exceeds the amount Overall Deactivation Costs Approved, the amount of the excess shall be includible in the gross income of the Contractor in the tax year in which the excess occurs. Section 7 Depreciation 7.1 The depreciation deductions for an asset with a useful life exceeding one (1) year allowable under Sections 5 of the Taxation of Bayu-Undan Contractors Act and 11 of the Law on Income Tax for tangible assets used in petroleum operations are permissible only when the Contractor is the legal and titled owner of the asset, and the asset is used in furtherance of the business activities of the taxpayer and exclusively in connection with a petroleum project. 7.2 The costs of acquisition, construction costs, installations, improvements or repairs that enhance the value or convert the asset from one use to the other or prolong the life of a tangible asset are required to be depreciated exclusively on a straight-line basis and each asset is required to be depreciated individually. 7.3 For the purposes of calculating depreciation deductions in respect of tangible assets used in petroleum operations and which is connected to a petroleum agreement, the amount and rates of depreciation shall be as follows: USEFUL LIFE OF ASSETS DEPRECIATION RATES One-Four (1-4) years Twenty five percent (25%) Over Four (4) years Twenty percent (20%) 7.4 Other than the year in which first production commences, the amount of the depreciation deduction allowable in that tax year under paragraph 7.3 in respect of a depreciable asset, shall be calculated in accordance with the following formula: 15

A x B Where: (A is the cost of the asset; and B is the applicable depreciation rate prescribed in paragraph 7.3). 7.5.1 In the year in which first production commences, the amount of the depreciation deduction in respect of a depreciable asset acquired, created and or constructed before the commencement of the first production is calculated in accordance with the following formula: A x B/C Where A is the value determined under paragraph 7.3; B is the number of days from the date of the first production until the end of the tax year in which the first production has occurred; and C is the number of days in the tax year. 7.6 The depreciation of tangible assets under the present Regulation and Sections 5 of the Taxation of Bayu-Undan Contractors Act and 11 of the Law on Income Tax, whether acquired or built before the commencement of the first production, shall be calculated and be deductible for tax purposes only from the date of the first production. Section 8 Amortisation 8.1 The amortisation of Exploration, Development and other expenses incurred in respect of petroleum activities (intangibles), including those incurred by a Contractor prior to the commencement of the first production, in creating, acquiring and or preserving an intangible asset with a useful life exceeding one (1) year, shall be calculated individually and exclusively on a straight line basis. 8.2 For the purposes of calculating amortisation deductions in respect of intangible assets used in petroleum operations and which is connected to a petroleum agreement, the amount and rates of amortisation shall be as follows: USEFUL LIFE OF ASSETS AMORTISATION RATES One-Four (1-4) years Twenty five percent (25%) Over Four (4) years Twenty percent (20%) 8.3 16

Other than the year in which first production commences, the amount of the amortisation deduction allowable in that tax year under paragraph 8.2 in respect of an amortisable asset, shall be calculated in accordance with the following formula: A x B Where: (A is the cost of the asset; and B is the applicable depreciation rate prescribed in paragraph 8.2). 8.4. In the year in which first production commences, the amount of the amortisation deduction in respect of an amortisable asset owned by the Contractor before the commencement of the first production is calculated in accordance with the following formula: A x B/C Where A is the value determined under paragraph 8.2; B is the number of days from the date of the first production until the end of the tax year in which the first production has occurred; and C is the number of days in the tax year. 8.5 The amortisation of an intangible assets, whether acquired or developed before the first production date, shall be calculated and be deductible for tax purposes only from the date of the first production. Section 9 First Production For the purposes of Sections 7 and 8 of the present Regulation, the first production occurs when there are at least thirty (30) days of commercial production, and the commencement of the first production shall be the first 30-day period. 10.1 Inventories shall: Section 10 Inventory (a) conform as nearly as may be to the best accounting practice in the trade or business, and (b) must clearly reflect the income. 17

10.2. Inventories shall be valued at cost or market, whichever is lower. Where inventories are valued at cost by the Contractor, the cost shall be determined according to the absorption-cost method. 10.2.2 Where particular items of inventory are not readily identifiable, a Contractor may account for inventory under first-in-first-out (FIFO) or the weighted average cost method. 10.2.3 A change of inventory method is permissible subject to the written approval of the Commissioner and subject to any terms and conditions that the Commissioner may impose to reflect accurate income and expenditures. 10.3 (a) Use of full absorption method of inventory costing. In order to conform as nearly as may be possible to the best accounting practices and to clearly reflect income as required by section 9.1(b) of the present Regulations, both direct and indirect production costs must be taken into account in the computation of inventoriable costs in accordance with the full absorption method of inventory costing. Under the full absorption method of inventory costing production costs must be allocated to goods produced during the taxable year, whether sold during the taxable year or in inventory at the close of the taxable year determined in accordance with the taxpayer's method of identifying goods in inventory; (b) the taxpayer must include as inventoriable costs all direct and indirect production costs ; (c) costs are considered to be production costs to the extent that they are incident to and necessary for production or manufacturing operations or processes. Production costs include direct production costs and fixed and variable indirect production costs; (d) costs classified as direct production costs are generally those costs which are incident to and necessary for production or manufacturing operations or processes and are components of the cost of either direct material or direct labor. Direct material costs include the cost of those materials which become an integral part of the specific product and those materials which are consumed in the ordinary course of production or manufacturing and can be identified or associated with particular units or groups of units of that product; (e) direct labor costs include the cost of labor which can be identified or associated with particular units or groups of units; (f) the term indirect production costs includes all costs which are incident to and necessary for production or manufacturing operations or processes other than direct production costs (as defined in subparagraph (d) of this paragraph). Indirect production costs may be classified as to kind or type in accordance with acceptable accounting principles so as to enable convenient identification with various production or manufacturing activities or functions and to facilitate reasonable groupings of such costs for purposes of determining unit product costs. 18

Section 11 Withholding Tax 11.1 Pursuant to the provisions of Article 23.1(3) and Section 8 of the Taxation of Bayu-Undan Contractors Act, royalty or similar payment made by a Contractor or Subcontractor to a resident taxpayer or permanent establishment in respect of any petroleum project shall be subject to withholding tax at five decimal four percent (5.4%), being 6% of ninety percent (90%) of the gross amount. 11.2 Pursuant to the provisions of Article 26.1(c) and (d) and Section 8 of the Taxation of Bayu- Undan Contractors Act, payments such as royalties, rent, income connected with the use of property, compensation for services, work and activities made by a Contractor or Subcontractor to a non-resident taxpayer other than a permanent establishment in Timor-Leste and in respect of any petroleum project shall be subject to withholding tax at seven decimal two (7.2%), being 8% of ninety percent (90%) of the gross amount. 11.3 Notwithstanding the provision of paragraph 10.2, compensation or remuneration paid by Contractors or Subcontractors under Article 26.1(d) of the Law on Income Tax, to dependent non-resident employees, for services connected with a petroleum shall be subject to withholding tax at eighteen percent (18%), being 20% of ninety percent (90%) of the gross amount. 11.4 The net income of a permanent establishment carrying on petroleum and natural gas exploration (drilling) activities in respect of a petroleum project shall be subject to withholding tax at five decimal four percent (5.40%), being 6% of ninety percent (90%) of the gross income, and that sum shall be the basis for the monthly tax installment payments prescribed under Section 25 of the Law on Income Tax. 11.5 The net income of a permanent establishment providing shipping or air transportation services in respect of a petroleum project shall be subject to withholding tax at two decimal sixteen (2.16%), being 2.4% of ninety percent (90%) of the gross income, and that sum shall be the basis for the monthly tax installment payments prescribed under Section 25 of the Law on Income Tax. Section 12 Obligations of a Person Withholding Tax from a Payment 12.1 A Contractor or Subcontractor who has the obligation to withhold tax under Articles 21, 23 and 26 of the Law on Income Tax and or Section 8 of TBUCA, and who has withheld tax accordingly, shall remit the tax withheld to the Petroleum Fund account held by the Timor-Leste Central Bank within fifteen (15) days after the end of the month in which the payment was made. 19

12.2 At the time of the payment, the payer must issue to the recipient of the payment a withholding tax notice setting out the amount of the payment made and the amount of tax withheld from such payment. 12.3 A contractor or Subcontractor who fails to withhold tax in accordance with any enabling laws or under the present Regulations from a payment made by the person is personally liable to pay the amount of the tax which has not been withheld. 12.4 A Contractor or Subcontractor who has been personally held liable under subparagraph 12.3 above and who has made a payment of the tax due to the Timor-Leste government is entitled to recover the amount of the tax from the recipient of such payment. 12.5 For the limited purpose of the present Regulations, Section 8 of the Taxation of Bayu-Undan Contractors Act and Articles 21, 23 and 26 of the Law on Income Tax, any Contractor and or the Subcontractor obligated to withhold withholding tax shall be treated as an agent of the Tax Administration of Timor-Leste to the extent of such taxes required to be withheld. 12.5(a) In the event of the liquidation, merger, acquisition or bankruptcy of the person holding or having control over the tax withheld, the Tax Administration and or the Government of Timor-Leste shall have a first claim of right to the tax withheld before any distribution or transfer of property is made. 12.6 The legal regime applicable in relation to the collection and recovery of tax shall apply to any amount withheld or required to be withheld in accordance with this Section. 12.7 The provisions of Sections 72 to 74 of the UNTAET Regulation 2000/18 shall be applied separately and jointly by the Tax Administration to any understatement or underpayment in respect of any tax owed and which is connected with withholding tax obligations of any person. Section 13 Non-Deductible Expenses in respect of Income Tax 13.1 In determining the taxable income of an income taxpayer, non-deductible items shall be: 20 (a) distribution of profits such as dividends and by whatever name or form; (b) penalties of any kind, penal or administrative; (c) excessive compensation paid by a legal person for work performed and paid to shareholders or related parties as compensation; (d) incentives, pension fund payments, and insurance premiums for personal interest and/or the families of expatriate employees, management and shareholders;

(e) losses arising from a transaction with a related party where transactions were determined by the Commissioner not to be at arm s-length; (f) costs incurred for the benefit of a related party or shareholders; (g) bad debts; (h) exploration and development costs incurred before the commencement of commercial production and which are required to be capitalized; (i) reserves, other than approved deactivation cost reserve under Section 4 of the Taxation of Bayu-Undan Contractors Act; (j) salaries paid to members of an association, limited or unlimited partnerships without share capital; (k) costs incurred by a Contractor and not in connection with a Contract Area as defined under the relevant Production Sharing Contract; (l) if an income taxpayer is required to withhold tax from a payment that is deductible as necessary and ordinary business expense of the taxpayer, including payment of wages, the deduction is not allowed until the taxpayer pays the withheld tax to the Tax Administration; (m) a fine or other monetary penalty imposed for violation of any law, rule or regulations; (n) a bribe or any similar amount; (o) an expenditure or loss incurred to the extent recoverable under a policy of insurance or contract of indemnity; (p) the acquisition costs of an asset having a useful life of more than one (1) year; (q) payments made by a permanent establishment to a head office or related party as royalties or other similar compensation in connection with property, patents or other similar rights; (r) compensation in connection with management services between related parties; (s) gifts, donations, aid (t) interest payments made by a permanent establishment to a head office or related party except when connected with a debt or loan from a bank and directly connected with a petroleum project in Timor-Leste and approved by the Designated Authority; (u) the following payments made by permanent establishment to a head office or related party: 1) long-term corporate planning; 2) policy; 3) public and government relations 4) finance\treasury; 5) advertising, donations, sponsorship; 6) entertaining; 7) legal; 8) intra-group relations; and 9) any payments whatsoever failing to meet the requirements and conditions stipulated in KEP-62 21

Section 13A Substantiation i. excepting for de minimis amount, defined to be five thousand US dollars (US$5,000) or less, a taxpayer claiming an amount as deductible business expense may be required by the Tax Administration to provide the proof of payment and evidence establishing the character of the expense, as a pre-condition for deductibility; ii. proof of payments may include invoices and accompanied with receipts, cancelled checks, evidence of electronic bank transfers and or bank statements; iii. invoices alone shall not operate as evidence of payment for substantiation purposes; iv. it is irrelevant for tax purposes that such expense or deductible cost was authorized under any contractual agreements between the taxpayer and a third party or third parties; and v. any contractual provision between a taxpayer and other parties authorizing an amount as a deductible expense for tax purposes shall not operate as a barrier against the substantiation requirement of the present Regulations. Section 13B Disallowance of Unsubstantiated Business Expenses (a) If the substantiation requirements of Section 13A of the present Regulations are not met, the Tax Administration may completely disallow the amount claimed as business deduction and subject the affected taxpayer to additional income tax, penalties and interest. (b) Any person, or any person required to file a return of information with respect to income under the applicable tax laws as stated in Section 3.1 of the Taxation of Bayu-Undan Contractors Act, other than an individual wage earner, shall keep such permanent books of account or business record, including inventories, as are sufficient to establish the amount of gross income, deductions, credits, or other matters required to be shown by such person in any tax return or information. (c) The books or records required by this Section shall be kept at all times available for inspection by authorized Tax Administration officers or employees and or third party agents, and shall be retained so long as the contents thereof may become material in the administration of any applicable tax laws in Timor-Leste. (d) All records required by the present Regulations in this part shall be kept, by the person required to keep them, at one or more convenient and safe locations in Timor-Leste, accessible to the Tax Administration officers, employees and or authorized agents, and shall at all times be available for inspection by the Tax Administration. Section 14 Transfer of Rights or Stakes in a Petroleum Project 14.1 A Right or Stakes in a Petroleum Project is deemed to be transferred or assigned in whole by a Contractor where; 22